Zinc has exploded upward from its low in January of 2016 and it doesn’t appear to be coming down any time soon. Supply constraints caused by mine closures, mining issues and Glencore’s 500K tonne production cut have led the way to higher zinc prices in 2016.

Source: London Metals Exchange

To understand this bullish trend in zinc prices, I’ve put together a 2-part series examining the supply and demand fundamentals of the zinc industry.

Here, in Part 1, I’ll examine the supply side of the zinc market, including a few tidbits on the zinc mineralization and the ore bodies in which it’s found.

Enjoy!

 

Zinc Mining

There’s an abundance of zinc in the earth’s crust, but like many metals, abundance doesn’t necessarily mean it can be extracted economically at the current price. Because of zinc’s relative abundance and important uses, zinc is mined in over 50 countries. Here’s a look at the current world zinc reserves:

 

Source: U.S. Geological Survey

 

Some commonly found mineral forms of zinc are:

• Sphalerite (zinc blende) – the most commonly mined zinc mineral in the world. The Sphalerite Mineral contains 67% zinc.
• Marmatite – a zinc-iron sulfide, which is commonly found but rarely mined
• Smithsonite (calamine) – zinc carbonate, typically found near surface
• Hemimorphite – hydrated silicate
• Willemitte

 

Zinc mineralization is commonly found in 4 types of ore bodies:

• Volcanic hosted Massive Sulfides (VMS)
  • “[VMS] deposits are predominantly stratiform accumulations of sulfide minerals that precipitate from hydrothermal fluids at or below the sea floor, in a wide range of ancient and modern geological settings (Figs. 1, 2). They occur within volcanosedimentary stratigraphic successions, and are commonly coeval and coincident with volcanic rocks. As a class, they represent a significant source of the world’s Cu, Zn, Pb, Au, and Ag ores”~ Geo Science World

• Carbonate hosted Lead-Zinc  (Mississippi Valley and Irish Types)
  • “These ore bodies tend to be compact, fairly uniform plug-like or pipe-like replacements of their host carbonate sequences… Mississippi Valley Type or MVT ore deposits, after a number of such deposits along the Mississippi River in the United States…  Irish-type carbonate lead-zinc ores, exemplified by Lisheen Mine in County Tipperary, are formed in similar ways.” ~Wikipedia

• Sediment hosted (SEDEX deposits)
  • “SEDEX deposits form deep under the ocean where vents in the sea floor allow hydrothermal fluids to mix with seawater.  These hot, saline fluids have percolated through several kilometers of sediments and crystalline rocks, picking up precious metals along the way. As the metal-rich hydrothermal fluids hit the cool sea water, they precipitate material onto the sea floor at and near the vents.  Metal-rich minerals are deposited between layers of fine-grained mud, sand and silt.”~ Geology for Investors

• Intrusion related (high sulfidation, skarn, manto, vein)
  • “These deposits are typically found in carbonate rocks in conjunction with magmatic-hydrothermal systems and are characterized by mineral association of calcium and magnesium. Typically the ore body contains more lead than zinc and is associated with silver.” ~International Zinc Association

 

Zinc is mined in the traditional manners: Underground, in an open pit, or a combination of the two. To note, underground zinc mining is the most common process, representing more than 60% of annual production.

NOTE: Zinc deposits aren’t unlike many other mineral deposits, in that they do have a number of issues that prevent projects from being economic. Here’s a brief list of some of the issues: Poor by-product grades, low grade zinc, remote deposit locations and high impurities such as manganese.

The zinc ore is drilled or blasted, the rough ore is then brought to the surface or to an area on the surface where it is crushed and finely ground. For efficiency and economics, the finely ground ore is then processed through a froth flotation circuit where the zinc concentration is increased anywhere from 3.5 to 15% to an average of around 50%.

The froth flotation process is as follows:

• Zinc ore, water and chemicals are mixed together in banks of flotation cells.
• Air is then constantly blown into the cell, providing constant agitation of the solution.
• The zinc sulphide particles stick to the air bubbles which rise to the top of the cell.
• The tailings or unwanted metals of the solution sink to the bottom of the cell, leaving the concentrated zinc sulphide on the surface.
• After a period of time, the zinc sulphide concentrate can be skimmed from the cell’s surface, dried and packaged for delivery to the smelter, where the concentrate will be further refined.
  • Not all concentrates are created equal, as the residual elements such as the amount of iron make some concentrates more desirable than others due to their lower refinement costs.
• It should be highlighted that the transportation of the concentrate to the smelter is the mine’s responsibility and, therefore, in some cases, makes up a huge portion of their cost. Needless to say, it’s an advantage to have a smelter in close proximity to the zinc mine.

 

NOTE: In addition to the zinc concentrate, other base metal concentrates such as lead and copper concentrate are commonly created.  Base and precious metal by-products can really add to the bottom line and, in some cases, they are the reason the deposit is economic. In turn, however, when these by-product metal prices fall, so do the economics of the mine which depends on them.

 

 

Zinc Mine Supply

Source: International Lead and Zinc Study Group

 

Zinc is mined all around the world, but a couple of spots in particular make up roughly half of the world’s mine production each year; China and Peru. In reality, China is the heavyweight when it comes to zinc production as its 5.5 million tonnes of zinc production is 4 times as much as the next largest producer, Peru, with 1.3 million tonnes. Australia is an honourable mention as before 2016, it held the position as the 2^nd largest zinc producer in the world.

Over the last year, China has ramped up its production by almost 20%, however, this big leap in mine production was almost erased by the drop in production by the rest of the world. In total, 2016 ended with 22 more tonnes produced than 2015. The caveat to this analysis is that any data from China should be taken with caution as it may not be completely reliable.

The countries with the largest drops in zinc mine production since 2015 were Australia at -43.1% or 680K tonnes, India at -16.8% or 138K tonnes, Peru at -6.0% or 85 tonnes, and the United States at -2.3% or 19 tonnes.

 

Source: International Lead and Zinc Study Group

 

Australia

Australia’s production was drastically cut in 2016 due to the shutting down of MMG’s Century Mine. Century was Australia’s largest open cut zinc mine and was highly valued by smelters because its zinc concentrate had such low iron content, which helped minimize the smelter’s refinement costs.  The Century Mine’s loss of production will have to be filled by an increase in production from other mills or new zinc mines coming into production, or a combination of the two.

Additionally, on October 9, 2015, Glencore announced a reduction in its mine production by 500K, or a third of their annual zinc metal production, across their operations in Australia, South America and Kazakhstan. The reason for the reduction? The company states that the low zinc and lead prices do not properly reflect the metals scarcity and, therefore, they’re moving ahead with the cut in production until prices rise.  Glencore’s reduction affects its Australian mines by approximately 380K tonnes, and its Peruvian operations by 80K tonnes.  As the zinc price rises, Glencore may decide to bring this production back online , which will not happen overnight, but will have an impact on the zinc market supply dynamics when it does.

 

India

Indian zinc is mined by Hindustan Zinc Limited (HZ) a subsidiary of Vedanta Limited. HZ’s production is led by their flagship operation, the Rampura Aqucha Mine (RAM), which has a zinc reserve of 51.1 mt at 14.0% Zn, and an ore capacity of 6.15 mtpa. Details can be found in HZ corporate presentation from last summer and the summer of 2015. In particular, look at the last slide of 2015’s presentation. The last slide details HZ’s mine reserves, highlighting the quickly declining open pit portion of the Rampura Aqucha mine. The open pit will be depleted by 2018, removing a significant source of zinc from the global market. The plan is to transition this into an underground mine, where there is still a substantial amount of zinc contained, however, they’ve experienced issues with the transition.

 

United States

American zinc mine production was impacted by Nyrstar’s placing of its Middle Tennessee Mines (MTN) on care and maintenance. The news release issued on December 7, 2015 outlines that the company’s decision to put the mining operation on care and maintenance was related to the current zinc price and, therefore, to minimize their cash consumption, they had to take action. MTN’s impact on the market is around 50K tonnes per annum.

On January 7, 2016 Nyrstar announced the formal launch of the sale process for all or the majority of its mining assets. Further, on September 27, 2016, Nyrstar announced that it would be restarting its MTN operations, given the rise in the zinc price and its expected sustainability in the future. The restart of MTN will cost USD $14 million, and it will take over a year until the mill is at full production.  Given the current bullish outlook for zinc prices, I think that these assets will find a buyer.

Also, American production will be affected by zinc production declines from one of the world’s largest producing mines, Teck’s Red Dog, which is located in Alaska. In early 2016, Teck announced a forecasted reduction in its zinc production in the years ahead; see SEDAR for further information.

 

Future Mine Production (Restarts / New)

There are some new and existing mining projects that are scheduled to come online in the next few years, stretching out to 2021. Here’s a list of the biggest 4:

• India – HZ’s Underground Portion of RAM
• South Africa – Vendanta’s (Exxarco/Sterlite) Gamsberg mine
• Australia – MMG’s Dugald River mine
• Peru – BHP/ Mitsubishi / Glencore / Teck’s Antamina mine expansion

There are a more projects planned over the same time period, but each is much smaller in size than the 4 that I have listed here.

 

Mine Contractions and Closures

While there are a few big mines coming back online or starting up, there are a number of closures and contractions that will occur over the next 5 years. The production contraction is headlined by Teck’s Red Dog, Sumitomo’s San Cristobal and Glencore’s Mt Isa, which will all see a steady decline in their output. Mine closures are headlined by the HZ’s RAM open pit and Kayad, Sterlite’s Skorpion (Closure by 2021) and Glencore’s Bracemac-McL in Canada, which is on pace for closure in 2019.

There are more contractions and closures albeit they are much smaller than the ones listed. Cumulatively, however, there is roughly 1,000K tonnes being removed from the market. Unfortunately, we may be able to count on the loss of production with more confidence than the mine expansions and re-starts.

 

Zinc Stockpiles

Besides mine production, another source of zinc in world markets is from stockpiles.  The International Lead and Zinc Study Group data shows that zinc stockpile inventories have been steadily dropping over the course of the last 4 years. Currently, world zinc inventories sit at 1.3 million tonnes, down 82K tonnes from last year. Currently, the largest stockpile holders are the producers and the London Metals Exchange, which both have inventories around 400k tonnes.

 

Concluding Remarks

In all, zinc mine production has been relatively flat over the last 4 years, with an increase of only 330K tonnes since 2012. As discussed, MMG’s Century mine production is gone and will need to be filled with new production, if that deficit is to be filled. Glencore’s missing 500K tonnes of production will have an effect on the market when it returns, but that won’t happen overnight. Using Nyrstar’s Middle Tennesse Mine as a gauge for re-start, I think that you can expect it to take 6 to 12 months for Glencore to be back at full production. Finally, India’s giant zinc mine is making a big transition moving to underground mining; time will tell if they are able to maintain production levels from this prolific mine site.  Mine production is falling faster than it’s being replaced, and the bottom line, in my mind anyway, is that until Glencore announces they are bringing their missing capacity back online, the diminishing zinc supply will lead to higher prices.

Disregarding China, the impact of new and re-starting mines will almost be nullified by the amount of mine production contractions and closures over the next 5 years. If new projects aren’t developed, we could be standing in much of the same position that we’re in today, as far as supply is concerned.

China will have an impact on the future of the zinc market – the size of this impact is what’s in question. What’s surprising is that China is paying closer attention to the environmental and safety impacts of mining and manufacturing.  Inspections over the last year have resulted in production suspensions and closures of the smaller producers that couldn’t comply with the more stringent regulations. I think China will continue to lead in zinc production in comparison to the rest of the world, however, the current large difference in production levels may not be as significant in the future as it is today.

Zinc supply fundamentals are bullish, but don’t tell us the whole story. In Part 2 of this series on zinc, I will take a look at world zinc consumption, which should allow us to make some conclusions about where the zinc market is headed in the months and years ahead.

 

Don’t want to miss a new investment idea, interview or financial product review, become a Junior Stock Review VIP now – for FREE!

 

Until next time,

 

Brian Leni  P.Eng

Founder – Junior Stock Review

 

Sources:

Australian Atlas of Minerals Resources, Mines & Processing Centres

CEO.ca – #zinc

Geo Science World

Geology for Investors

International Zinc Association

University of Tasmania

U.S. Geological Survey

Zinc Die Casting

 

Disclaimer: This is not an investment recommendation, it is an investment idea. I am not an investment professional, nor do I know you and your specific investment criteria. Please due your own due diligence. I have NOT been compensated to write this article and do NOT have a business relationship with any of the companies mentioned in this report. I do NOT own shares in any company mentioned.

Rickards’ Latest Book Predicts Financial Lockdown for Looming Crisis

In my opinion, The Road to Ruin is a book that everyone should read, no matter their interests.  James Rickards is at his best as he foretells how the world’s elites will deal with the impending financial crisis, which he believes will hit us by 2018.

 

ICE NINE

The premise of Road to Ruin is to reveal a plan set out by the world’s elites to freeze the financial system in the face of crisis. No longer will the governments of the world turn to quantitative easing (QE), but will “ICE NINE,” as Rickards puts it, everyone’s financial assets, essentially locking down the world’s financial system. This will mean shutting down the stock exchanges, freezing bank accounts and controlling anything and everything financial in people’s lives.

The effects of QE weren’t  felt by the average Joe, because most of the QE was filtered into America’s too big to fail companies, and mainly banks. A financial system lock down, however, will, without a doubt, be felt by everyone. Fortunes will be frozen in their trading accounts, unable to buy or sell. Bank accounts will be frozen, leaving us with a bare minimum in the way of available cash to buy food, if we are willing to line up and wait our turn at the ATM.

You may be thinking it will never happen, but unfortunately, as Rickards points out, this plan has already been executed, albeit on a smaller scale, in Cyprus in 2012.

Cyprus is the best example of this new way of dealing with a financial crisis, as the European Union was concerned about the contagion of the Cypriot crisis and, therefore, shut down their financial system. The residents of Cyprus had their bank accounts frozen, left to rely on a daily stipend that was plagued by massive lineups. Basically, most had to get by with whatever cash or tradable items they had in their possession.

Those with over $100,000 Euros on deposit with Laiki Bank and Bank of Cyprus were given a haircut of 10% on their deposits . This haircut is referred to as a ‘bail-in,’ and it was used to help re-capitalize the failed banks, reducing the cost to the rest of the European Union.

 

Economic Theory

Rickards’ points out, on numerous occasions, that the Federal Reserve and other central banks around the world are using wrong and outdated models to forecast the future of the world’s economy. Rickards states,

“General equilibrium models also suffer from fallacy of composition. Elites assume local equilibria can be aggregated into a larger equilibrium called the economy. This is like inferring the totality of human nature from a strand of DNA without ever meeting a human.” ~The Road to Ruin pg.210

Equilibrium systems do not have memory, and as Rickards points out, this is a major sticking point when using it for financial market modelling. To further explain his position, he uses a comparison of an economist using equilibrium theory and Ricardian principles (referring to David Ricardo’s, The Principles of Political Economy and Taxation) to examine markets, and the physicists of today using Newton’s theories to explain the universe when Einstein’s Theory of Relativity would do a much better job.

Interestingly, physics is a fantastic way to examine how complex subjects are examined. Newton’s theories came first and work well for the world that we live in, day to day, while Einstein’s Relativity works best on a grand scale, mainly space. Finally, Quantum Mechanics is best used to explain the quantum world, which wasn’t even considered during Newton’s days.

Parlaying this analogy to economics, I much prefer Rickards’ breakdown of financial tools, Complexity Theory, Behavioural Psychology, and Bayesian Statistics, as he uses a different method to look at each aspect of the financial markets, just as physicists do with their theories of nature.

 

The Cycles of Life and Financial Markets

Whether it is Kondratieff wave theory or William Strauss and Neil Howe’s (authors of The Fourth Turning) analysis of the cycles of generations, we are in a crisis period of world history, or ‘winter,’ so to speak. Winter periods are characteristic with major historical turning points; decisions made by the people in crisis will dictate how the next major generational cycle will take form. Fear will either drive us to a prosperous spring or lead us down a very dark path.

Rickards adds to this sentiment and points out,

“They wait for an exogenous shock, a natural disaster or financial crisis, then use fear created by shock to advance their vision. New policy is presented to mitigate the fear.” ~The Road to Ruin – pg.89

“Fear is contagious, like a virus” ~The Road to Ruin pg 295

In my mind, it’s clear that both the Canadian and American voting public have been affected by the turmoil of the last 8 years. As leaders, both Justin Trudeau and Donald Trump are better known for everything but a political background, which certainly speaks to the public’s desire for something ‘different’ in a political leader. The question that remains to be answered is whether the public have chosen wisely or emotion has once again skewed judgement.

 

Fascism

The Road to Ruin goes much further than I thought it would into the realm of government control over markets and people’s everyday lives. While most believe what we see today to be a further  push toward socialism, Rickards states,

“Facism is not in our future, it is here now.” ~The Road to Ruin pg.256

Those who follow the ‘alternative media’ have been exposed to this line of thinking for more than a decade, with 9/11 truly being one of the most polarizing events this world has ever seen, on a number of levels.

What is fascism? Rickards summarizes Jonah Goldberg’s 2008 book, Liberal Fascism, when he says,

“fascist regimes may be quite unalike. Some are murderous such as those of Hitler and Stalin. Some are doctorial such as those of Mussolini and Franco. Some operate within democratic frameworks such as those of Wilson and FDR. What unites them is a shared view that the state is the exclusive mediator of human activity…action through state power” ~ The Road to Ruin pg.257

Over the last decade, whistle blowing on the activities of governments and elites has hit the mainstream, with Julian Assange and Edward Snowden becoming household names.  My question is whether the claims by these people were really heard. With the picture that Rickards paints, I would tend to say that they have not been, or rather, the claims were heard but not fully understood.

 

Special Drawing Rights

How will the elites resolve the financial crisis once they freeze the system? Well, Rickards believes that they will institute more fiat currency, Special Drawing Rights (SDR). SDRs are controlled by the world’s central bank, the International Monetary Fund (IMF) and are backed by the world’s largest currencies; the American dollar, the Euro, the Japanese Yen, the British Sterling, and finally, its most recent member, the Chinese Yuang.

The Chinese have gained access to this privileged currency group with their massive accumulation of gold, over the last decade. China is the number 1 producer of gold in the world and the number one consumer, engulfing each ounce that it produces within its borders.

Rickards pointedly states:

“The elite agenda is to hoard gold and substitute special drawing rights as the currency of world trade and finance” ~The Road to Ruin – pg.59

If you want to know more about SDRs, I highly suggest reading Rickards’ previous books, Currency Wars and The Death of Money. These books take a much more in-depth look at the subject and are good reads.

 

Rickards’ Financial Toolkit

Rickards is one of the most trusted financial minds in the world and his rolodex is proof of how far his reach really is.  The Road to Ruin is laced with commentary from the conversations he has had with some of the heaviest hitters in the American Financial world. Along with this commentary, Rickards reveals the financial toolkit that he uses to examine the state of the world’s financial system, which includes:

• Behaviour Psychology – The key to understanding behaviour psychology, according to Rickards, is to realize that human behaviour in financial markets is irrational and inefficient. For those interested in the topic of the irrational behaviour of humans, check out Dan Ariely’s Predictably Irrational; it’s a great read and a little scary if you apply what he says to your own life!
• Complexity Theory – Rickards explains Complexity theory using 4 main attributes: diversity, connectedness, interaction and adaption. A system which has these attributes is complex and, therefore, is much harder to predict or forecast than the equilibrium systems that most economists of today use to model capital markets.
• Casual Inference or Bayesian Statistics – Bayesian probability says that certain events are path dependent, or simply, they have memory. In a random process such as the tossing of a coin, the preceding coin toss does not affect what is going to happen with the next coin toss. In a complex system, such as the stock market, events occurring over the course of time have an effect on the buying and selling that occurs, making the possible outcome more or less likely.

 

In closing, The Road to Ruin covers a lot of important information that people need to be either reminded of or alerted to. The bottom line is that we live in a world in transition, where crisis and turmoil is more common than stability. I believe Rickards’ message is to be cognizant of the outcomes of a flawed financial system, the motivations behind the elites who control the governing bodies of the world, and finally, to prepare yourself and your family for the freezing of your financial assets.

“Society does not get endlessly richer and more sophisticated. Periodically things collapse. It is not the end of the world. It is the end of an age.” ~The Road to Ruin pg.297

Check out James Rickards’ new book, The Road to Ruin. You won’t be disappointed!

 

In Rickards’ conclusion to the book, he gives the reader a portfolio for weathering the impending storm. Now, I think it only fair to Rickards that you purchase the book to find out what’s in that portfolio. I will, however, review a few financial products that I believe will help those who want to prepare for the financial future that Rickards is predicting, over the course of the next month or so. Stay tuned!

 

If you enjoyed this article and don’t want to miss another financial product review or investment idea, become a Junior Stock Review VIP now, for FREE!

 

Until next time,

 

Brian Leni  P.Eng

Founder – Junior Stock Review

 

 

Why lithium? Great question. In my opinion, it’s simultaneously the simplest and most complex metal. Lithium’s ‘simplicity’ comes from the fact that it’s been used in industry for quite some time, and most of the general public know the metal in its battery form. Its complexity relates to the science behind how and why it’s presently used, but more importantly, the role lithium will play in the future.

Lithium isn’t rare, but the lithium market is definitely under developed in comparison to most other industrial commodities, leaving the space to a select few conglomerate giants and a group of junior companies. The fact is, lithium has a ton of applications, from lubricating grease and glass fabrication, to glazes for ceramics, and finally, batteries. In particular, lithium is and will continue to play an increasingly important role in the battery-powered clean air future.

Let’s take a closer look at the lithium narrative…

 

Lithium – Hard-Rock and Brine

Lithium is present in a number of different minerals, but for those who deal with its commercial extraction, there are really only a few that are of interest.

 

Pegmatites

Pegmatites are commonly found throughout the world, but lithium-rich granite pegmatites are much less common, making up less than 1%. Granite pegmatite-ore bodies are the hard-rock source of lithium. The lithium minerals that occur in granite pegmatites are spodumene, apatite, lepidolite, tourmaline and amblygonite.

Spodumene is the most commonly occurring lithium hard-rock mineral, which, once upon a time, made it the number one source of lithium metal in the world. It has since been surpassed by brines, which, for a number of reasons, have become the largest contributor to lithium production.

Pegmatite Hard-Rock Processing

Lithium hard-rock recovery can be broken down into a few key steps: crushing of the ore, concentration by froth floatation, followed by hydrometallurgy and precipitation from an aqueous solution. From here, depending on the application, the producer will typically create either lithium hydroxide or lithium carbonate, which can be sent to factories to be manufactured into its final form.

When evaluating a hard-rock lithium deposit, there are a few key things to look for:

Lithium Grade – Arguably the most important figure in any type of deposit. Typically, the higher the grade of lithium, the more economic the deposit.

By-Products – Not to be confused with ‘harmful’ impurities, by-products can help reduce the cost per ton because they have value. For lithium hard-rock deposits, tantalum, beryllium and caesium are examples of profitable by-products of the refinement process.

Impurity Levels – High concentrations of impurities (non-profitable by-products) can lead to higher refinement costs and could limit their use in end use applications, such as glass and ceramics.

Location – Poor proximity to infrastructure can make a high grade lithium mine a lot less profitable or not even economically feasible.

 

Brines

Lithium brine deposits are accumulations of saline groundwater that are enriched in dissolved lithium. Lithium concentrations are typically measured in parts per million (ppm), milligrams per litre (mg/L) and weight percentage.

Brine is pumped up from the ground and placed into man-made ponds, where the lithium is concentrated via evaporation. Depending on the climate and weather in the region of the brine deposit, lithium concentration can take a few months to a year. Typically, lithium concentrations range between 1 and 2%. Unlike their hard-rock cousins, these concentrations can be sent to processing plants for end use production.

All lithium brine deposits have a few common characteristics (Bradley, Munk, Jochens, Hynek, Labay. USGS – A Preliminary Deposit Model for Lithium Brines, 4).

• Arid climates
• Closed basin containing a playa or salar
• Tectonically driven subsidence
• Associated igneous or geothermal activity
• Suitable lithium source-rocks
• One or more aquifers
• Sufficient time to concentrate a brine

 

Similarly to the list of common characteristics for brine deposits, there are a few things that are particularly important when evaluating a brine deposit:

Evaporation Rate – evaporation is dependent upon the climate in which the deposit is located. Hours of sunlight, humidity, wind levels and temperature all have an effect on the evaporation rate. A low evaporation rate could make the difference between an economic deposit and an uneconomic one.

Lithium Grade – Arguably the most important figure in any type of deposit. Typically, the higher the grade of lithium, the more economic the deposit.

By-Products – Not to be confused with ‘harmful’ impurities, by-products can help reduce the cost per ton because they have value. For lithium deposits, the primary by-product is potassium.

Location – Poor proximity to infrastructure can make a high grade lithium mine a lot less profitable or not even economically feasible.

Impurity Levels – The magnesium to lithium ratio and the sulphate to lithium ratio are very important figures to look at when examining a brine deposit, because separating these impurities from the lithium is one of the largest expenses in the brine refinement process. For both of these ratios, you’re looking for low figures.

Brines are today’s answer to lithium demand as they are more wide spread, typically larger in resource scale, and generally have lower production costs.  Countries such as Chile, Argentina and China extract the majority of their lithium production from brine deposits.

 

 

The Lithium Supply Story

Source: United States Geological Survey (USGS)

Lithium reserves exist on 5 continents: North America, South America, Africa, Asia and Australia. As the table shows, however, there are reserves on 5 continents but the concentration is in South America, where there’s approximately 66% of the world’s reserves.

‘The Lithium Triangle’ refers to Chile, Argentina and Bolivia. Beginning with Chile, the number 2 producer of lithium in the world and 1st in reserves, their reserves are held in brine deposits. Its main brine deposit is The Salar de Atacama, which is located in the Antofagasta region. The Salar de Atacama is approximately 3000 square kilometres and has an estimated 6.8 Mt of lithium reserves.

For reference, ‘salar’ means a salt-encrusted depression (as in the nitrate fields in Chile) that may or may not be the basin of an evaporated lake

The other key player in The Lithium Triangle is Argentina, the number 3 producer of lithium in the world and 3rd in reserves. Argentina’s source of lithium, like Chile, is found in brines. Although Bolivia currently makes up the smallest portion of The Lithium Triangle, it’s thought to have the largest undeveloped lithium brine in the world, Salar de Uyuni. USGS Mineral Commodity Summaries estimates that this prized salt flat contains 9 million tonnes of identified lithium resource.

China is the number 4 producer of lithium in the world and 2nd in reserves. China’s lithium deposits are found both in hard-rock and brine sources. Its lithium-rich pegmatite deposits are found in Jiajika, Barkam, Altai, Koktokay and the Nanping district, while its lithium-rich brines, which possess the vast majority of its reserves, are found mainly on the Quighai-Tibet plateau.

Currently, Australia is the number 1 producer of lithium in the world. Australia’s lithium is held in hard-rock deposits, mainly the Greenbushes deposit, which is currently in production. Finally, the Mount Cattlin and Mount Marion projects, which aren’t yet in production, are expected to alleviate some of the supply crunch for world demand in the future.

 

Lithium is primarily sold through private contracts which are controlled by 4 companies:

Source: Sociedad Quimca Y Minera De Chile  – Corporate presentation – Slide 11

 

With only 4 major players in the lithium market, I have put together some quick points on each company to give you an idea of who they are, where they are, and what they do.

 

Sichuan Tianqi Lithium Industries  – Tianqi information taken from their website, unless otherwise cited.

• Collectively, Chinese lithium producers have a market share of 40% (SQM – slide 11)
• Traded on the Shenzhen Exchange (SZSE)
• Based in China and founded in 1995. As stated on their website, “We…are a key enterprise to the Provincial Government’s initiative for the ‘Promotion and Support of Emerging Strategic Industries,’ ”
• Tianqi offers a diverse product line, with both specialty and industrial application lithium products.

 

Sociedad Quimca Y Minera De Chile (SQM) – All information acquired through corporate presentation

• Lithium market share of 26%
• Founded in 1968 to reorganize the Chilean nitrate industry. Over time, converted from a fully Chilean State owned company to a private enterprise by 1988.
• Ownership Structure: Pampa Group and Kona Group – 32%, Potash Corporation – 32%, Bank of New York (ADRS) – 23%, and Other – 13% .
• SQM is involved in a number of market segments, such as specialty plant nutrition, iodine, lithium, industrial chemicals, potassium and metals exploration.
• SQM lithium resources are held in salar brines within the Atacama Salt Desert region of Chile. Joint Venture Project in Argentina planned for production in 2019, with a 50K Mt/year capacity.
• Traded on the New York Stock Exchange (NYSE).

 

Albemarle –  All Albemarle information taken from website and Corporate Investor Presentation (September 13, 2016)

• 2015 Lithium market share of 20%.
• Traded on the New York Stock Exchange (NYSE).
• Headquartered in Charlotte, North Carolina, United States.
• Albemarle Paper Manufacturing Company was founded in 1887.
• Albemarle is involved in a number of market segments, such as refining solutions, lithium and advanced materials, bromine specialties, fine chemistry services, and Chemetall surface treatment.
• In 2015, Albemarle acquired Rockwood Holdings, parent company for Rockwood Lithium, for USD $6.2 Billion.
• Albemarle operates the world’s 2nd largest brine project on Salar de Atacama in Chile, with an output of 25 ktpa, and the Silver Peak brine operation in the U.S., with an output of 6 ktpa.
• Australian Hard-Rock Resources – Greenbushes Mine (through Talison JV) – Albemarle’s share of annual capacity is 30 ktpa.

FMC Corporation  – All FMC information taken from website.

• Lithium market share 12%.
• Traded on the New York Stock Exchange (NYSE).
• Established in 1883, FMC roots are in agriculture.
• Corporate Headquarters in Philadelphia, Pennsylvania and Charlotte, North Carolina.
• FMC is involved in a number of market segments, such as agriculture, health and nutrition and lithium.
• 79% of FMC’s lithium revenue is derived from the sale of lithium specialty products, such as lithium hydroxide, butyllithium, and high purity metal.

 

Technological Affects on Lithium Supply

A major impact to the lithium supply story could come from a technological breakthrough in the refinement of lithium brines. Current research and development dollars spent by South Korean giant, POSCO, and privately owned, Energi Corporation, are exploring methods of refining lithium brine without the use of evaporation.  The current major cost in the brine refinement process is the removal of impurities such as magnesium, calcium, iron and potassium via evaporation and additives.  If they are successful, it will revolutionize the lithium mining industry, as more deposits will become economical and existing mining operations could change production methods to capitalize on cheaper processing costs. When or if this occurs, is a big question.

That said, the fact that R&D dollars are being spent in lithium refinement is a major plus, in my books. With this much interest, I think you can almost guarantee a strong future for lithium, worldwide.

 

 

Lithium Demand

Currently, lithium’s demand is rooted in the following applications (in no particular order):

Lubricant Grease – An estimated 2.38 billion pound market, in which lithium-based greases make up 75%. Lithium-based greases generally have good stability, high temperature characteristics and water-resistance properties.

Glass – Lithium typically sourced from the mineral spodumene reduces the viscosity and thermal expansion of glass and, therefore, leads to increased melting efficiencies and/or larger effective furnace capacities. The end result is a substantial energy savings for the glass manufacturers.

Ceramics – Lithium is used in the ceramics industry to produce glazes. The glazes improve a ceramic piece’s shock absorption and stain resistance, protecting the piece against damage. Lithium carbonate is typically used for this application.

Health Products – Lithium, in small amounts (around 0.170 mg/L), is prescribed to those with bipolar disorders or individuals with depression who don’t respond to anti-depressants.

Batteries – Batteries are possibly the best known lithium application of all. It’s where the future lays for lithium demand. This will be explained further in the next section.

 

Batteries

Why is lithium used in batteries? Simply, with current technology, lithium provides the best combination of energy density (weight to power ratio) and price.

Batteries have essentially three main components: cathode, anode and electrolyte. When the cathode and anode are connected via a wire, for example, electrons flow from the anode through the wire to the cathode, creating an electrical current.

Currently, there are an estimated 80 different lithium-ion battery chemistries in production, with these varying chemistries all exhibiting different characteristics, such as capacity and voltage. Lithium is typically found in the cathode of the battery, commonly in the form of lithium cobalt oxide, while the electrolyte is commonly in the form of a lithium salt, such as LiPF6, LiBF4 or LiCLO4. The anode material is commonly carbon-based, with graphite being the most popular.

Overall, a lithium ion battery’s output is around 3.6 volts, which is more than twice as much as its alkaline cousin.

 

What does the current lithium demand by application look like?

Source: Deutsche Bank Markets Research – Lithium 101 – pg.23

Projected demand for 2025 is much different, not only in overall demand tonnage, but the percentages each application encompasses. The future is expected to be bright for batteries in the non-traditional markets; electric cars, e-bikes, and energy storage.

Source: Deutsche Bank Markets Research – Lithium 101 – pg.23

 

Lithium Present and Future Market Demand

Source: Deutsche Bank Markets Research – Lithium 101 – pg.23

The interesting thing about this projected demand curve is that it is linear. The reason I think that’s interesting is that most things in life don’t follow a linear path, especially those things that are rapidly changing, such as the lithium market. Now, the opposite could be true, the demand could be flat or declining in the future, but I tend to think that the future for lithium will be exponential.

For those who don’t know what an exponential function looks like, think of a hockey stick turned upwards with the blade in the air. Basically, it looks linear for a while, constant growth, and then boom – to the moon it goes.

Why do I think this? Mainly because of the politicized nature of green energy. Whether it’s the 450 Scenario or some other push to reduce carbon emissions, governments across the world are allocating more and more policy and CASH to the cause. The final inflection point could be massive and it could happen before 2025, in my opinion.

 

Emissions Perspective

The 450 Scenario calls for long-term concentrations of local greenhouse gases to be at 450 ppm CO2 equivalent by 2040. To put that into perspective, we globally emitted 32,381 Mt of CO2 in 2014 (International Energy Agency, 2016 Key World Energy Statistics, 45). Under the 450 Scenario, that number reduces dramatically to 18,777 Mt of CO2.

Using the United States as an example,  Statista states that there were around 260 million registered vehicles in the United States in 2014. The U.S. Energy Information Administration (EIA) estimates that U.S. fossil fuel consumption for transportation in 2015 resulted in a combined 1,545 million tonnes of CO2, which is 29% of the total CO2 emissions by the country.

Emissions per vehicle = 1,545,000,000 / 260,000,000 = 6 tonnes/vehicle

Therefore, my estimated carbon emissions per U.S. vehicle is around 6 tonnes per year. If the United States figures to comply with the goals of the 450 Scenario, to drop transportation emissions to 26%, in-line with the rest of the world, they will need a reduction of 3% (29% to 26%) (International Energy Agency, 2016 Key World Energy Statistics, 46). The following calculation shows that a reduction of this magnitude would affect approximately 7.7 million vehicles.

3% of 1,545,000,000 = 46,350,000 tonnes of CO2

46,350,000t / 6 t/vehicle = 7,725,000 vehicles

NOTE: This calculation should not be taken as exact, there are assumptions that have been made. The calculation is only to gain some perspective on the potential impact of the 450 Scenario.

Insideevs.com reports that there were 116,099 full electric vehicles sold in the United States in 2015, and 441,179 worldwide. If you linearly distribute the number of vehicles affected by the 450 Scenario on a 23-year time horizon (2017 to 2040), 7,725,000 / 23 = 335,870 vehicles per year would need to be sold, or almost 3 times the number of current sales per year.

This is provided that car demand in the United States stays where it is. If there is growth in the number of people who want to drive, this electric vehicle number would need to increase.

How does this equate to lithium demand? Well, it isn’t an easy calculation as there are a lot of assumptions, but I did find an estimate of 47 lbs (0.021 t) of lithium per Tesla Model S (sedan). If 335,870 Tesla Model S were sold in the United States in a given year, this would translate into 335,870 x 0.021 t of 7,053 t of lithium, or 37,544 t of lithium carbonate (conversion from Li to LiCO3 – 1 : 5.323)

 

To summarize this example:

• Calculation only represents a 3% decrease in American transportation carbon emissions.
• A 3% improvement in emissions will affect the equivalent of 7.7 million vehicles.
• If these 7.7 million vehicles were replaced by fully electric vehicles over the next 23 years (450 scenario deadline is 2040), that would equate to 335,870 cars sold each year. In my opinion, it is highly unlikely that it will be linearly distributed.
• Using 2015 data from insideevs.com, world demand is roughly 4 times that of the United States, thus, if the world kept pace, it would equal around 1.3 million vehicles per year.
• In terms of lithium carbonate, 1.3 million electric vehicles could mean 150,176 t in worldwide demand.

I believe this 3% improvement scenario for vehicles per year is conservative. In reality, I think demand in the next 5 years could easily be twice as much. Deutsche Bank believes demand will hit 2.4 million in global electric vehicles sold in 2025. They estimate total demand in terms of lithium carbonate equivalent to be 534 kt, of which batteries would make up 45% (Deutsche Bank, Lithium 101 Report, 24).

The following table gives you a quick conversion factor for some common lithium compounds.

Source: London Stock Exchange   

FYI – A quick example: If you’re given a resource in terms of %Spodumene, 5%, and you want to convert it to %Lithium, simply multiply the 5% by the lithium conversion factor 0.038, which equals 0.19%.

 

I believe it’s undeniable that lithium will play a major role in powering our clean air future. The trend is your friend and in this case it is only the beginning of what appears to be a major turning point in the way we live our day to day lives.

 

 

Until next time,

 

Brian

 

Disclaimer: This is not an investment recommendation, it is an investment idea. I am not an investment professional and do not know your specific investment criteria. Please do your own due diligence. I have not been paid to write this article, nor do I own any of the companies listed in this report.

My introduction to the junior resource market and my outlook on the world were heavily influenced by Doug Casey. Without a doubt, I wouldn’t be where I am today were it not for the impression he made. I’ve read virtually every book Casey has written, so I was intrigued, to say the least, when I heard he would be releasing a fictional story about speculation.

It’s funny how things seem to pop into your life at just the right moment, because in the case of Speculator, the philosophical narrative really resonated with me. In part, I’m sure it has something to do with the types of projects I’m currently working on, but also because it’s written in true Casey style.

 

Speculator Review

Doug Casey and John Hunt’s collaboratively written, Speculator, is the answer to those looking for an education in junior mining stock speculation – with a twist. What makes this book especially interesting is that it offers a reprieve from the sometimes boring confines of non-fiction writing with some fantastic story telling.

Speculator tells the story of Charles Knight, a young speculator, and his adventures in the fictional West African nation of Gondwana. Knight is drawn to Gondwana to investigate a junior gold company, B-F  Explorations, in which he holds a large speculative position.

What Knight finds during his time in Gondwana, however, will change his life forever; by following his instincts, he uncovers a fraud that will put his life and the people he cares about in jeopardy. His plan to expose this fraud navigates the ironic and idiotic nature of our governing bodies, and how doing the so to speak ‘right thing,’ really doesn’t do any good for anyone.

 

Questioning Social Norms

Knight’s adventure intertwines with a few different plot narratives, which discuss some very important social concepts that are so often overlooked or considered too ‘politically incorrect’ to broach. In my opinion, this is where Casey and Hunt are at their best, providing commentary that anyone not completely sold on social norms will find particularly thought-provoking.

This paragraph stood out for me as both a lesson in speculation and in life:

“Most people, navigating the waters of life, seemed sonar directed, setting their course based on what the rest of the school of fish was doing. These sonar-directed types spent their days pinging their surrounding, turning-often suddenly and without understanding why-when everyone else turned. Perhaps if they turned fast enough the ones on the edges would get eaten, instead of them. It was safer, but the crowd, necessarily, always got average results. And occasionally the entire mass got swallowed whole.” ~ Casey, Hunt. Speculator, 91 (PDF Version)

Knight encounters a number of challenges that test his moxie, as he must decide how far he’s willing to go to ensure B-F’s fraud is uncovered and his profits maximized. The adventure concludes fantastically, fraught with death, love and taxes (so to speak).

 

The People & Experiences that Shape Our Lives

The principles you choose to live by reflect who you are, and essentially, where your life will lead. I can hear Casey’s voice in almost every one of the characters in this book, and for me, they provide excellent thinking points, or words to live by.

There are two characters, in particular, that play a major role in shaping Knight’s character:

 

Uncle Maurice is really much more than an uncle, as Knight uses him as a barometer for his actions throughout the story. Maurice empowers his nephew to follow his dreams, to live life by a set of principles that help Knight overcome obstacles along the way.

There are a variety of lessons to be learned from this character, but a few that stood out for me were:

 

• The importance of soundness, which Knight defines as,

“Soundness means having integrity…People who are sound don’t live in contradictions. They’re…internally consistent…It’s being honest with yourself, for sure. Caring enough to seek the truth is part of it” (80-81).

 

• Listen to your instincts:

“Contrary to common opinion, intuition wasn’t mystical; it was scientific. Intuition was the ability to properly integrate many subtle pieces of information. To have good intuition, therefore, someone needs experience and data and a logical mind that can fuse them into coherence” (17).

 

• Be truthful:

“Truth never contradicts itself” (81), and, “lying to others is bad enough, but lying to myself is actually worse. I don’t have to live with other people, but I have to live with myself” (92).

 

Xander Winn is an experienced Dutch speculator, who imparts a great deal of wisdom throughout this adventure. Winn’s experiences combined with the fact that he shares similar principles make him the perfect supporting character for Knight, as they struggle to solve the issues that arise and to deal with the consequences of their actions.

For me, the following three themes were most prominent in the wisdom that Winn shares:

 

• Life lessons:

“Lesson One: to succeed, position yourself to take advantage of luck. Lesson Two: bad luck happens. So plan on bad luck, not good luck” (12).

Winn explains further:

“Luck materializes when preparation meets opportunity” (30).

 

• Money is important:

“Money is important. It’s not just hunks of metal, pieces of paper, or computer entries. It represents all the time you spend earning it. It represents all the good things you want to have, and do and provide for others. It really represents life itself, in concentrated form”  (25).

 

• Justification of your actions:

“In your life, make sure to watch how far down that slippery slope of justification you drop, okay? An emotionally laden human brain can justify a whole lot of evil” (257).

 

Speculator can be read on a number of different levels. It’s simultaneously a great adventure story – complete with death, love, and suspense, – a useful guide to speculation, and a philosophical commentary on some of the most important social topics of our world. Read Speculator, and no matter what you take from it, I guarantee you will be entertained.

Become a Junior Stock Review VIP and receive a FREE digital copy of Speculator. Sign up now!

 

Until next time,

Brian